Top Marginal US Tax Rates: 1916-2010

Here’s a great graph of US income tax rates back to when personal income taxes were started from Visualizing Economics (hat tip Barry Ritholtz). You can see the marginal rate for personal income has come way down from its 1945 peak.

A few months ago, Michael Hudson answered the question, "Why Did America Have A 90% Income Tax Under Eisenhower? ". He says the original premise of the income tax law was based on 18th and 19th century classical economics and the price theory of economic rent. First and foremost, Hudson says that meant to the economists of the late 19th century and early 20th century that America would get rich through productivity gains that came from the work of highly paid labour. Hudson argues that is why Asia is more productive today: because living standards are increasing. However, to the degree one made considerably more than the average income, Hudson argues it was assumed in the early 20th century that this was the result of rent-seeking or monopoly privilege of the sort we saw during feudalism. Therefore this income was largely taxed away.

Watch the video for his answer, but this quote from another post of his below gives you the gist.

[Adam] Smith argued, its industrial capitalism would have to shed the vestiges of feudalism. Ground rent charged by its landed aristocracy should be taxed away, on the logic that it was the prototypical “free lunch” revenue with no counterpart cost of production. He noted at the outset (Book I, ch. xi) that there were “some parts of the produce of land for which the demand must always be such as to afford a greater price than what is sufficient to bring them to market.”

In 1814, David Buchanan published an edition of The Wealth of Nations with a volume of his own notes and commentary, attributing rent to monopoly (III:272n), and concluding that it represented a mere transfer payment, not actually reimbursing the production of value. High rents enriched landlords at the expense of food consumers – what economists call a zero-sum game at another’s expense.

The 19th century elaborated the concept of economic rent as that element of price which found no counterpart in actual cost of production. and hence was “unearned.” It was a form of economic overhead that added unnecessarily to prices. In 1817, David Ricardo’s Principles of Political Economy and Taxation elaborated the concept of economic rent. Under conditions of diminishing soil fertility in the face of growing demand, value was set at the high-cost margin of production. Low-cost producers benefited from the rising price level. Ricardo helped clarify the concept of differential rent by applying it to mining and subsoil wealth as well as to land. Heinrich von Thünen soon added the more helpful concept of rent-of-location (site value).

The important classical point was that economic rent was produced either by nature or by special privilege (“monopoly”), not labor effort. Hence, it was that element of price that could not be explained by the labor theory of value, except by marginal costs on what Ricardo hypothesized to be “rentless land” as recourse was made to poorer soils. Ricardo’s follower John Stuart Mill explained that being income without labor or other costs, such rent formed the natural basis for taxation.

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty five years of business experience. He has also been a regular economic and financial commentator in print and on television for the past decade. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College.